Palo Alto Networks' (PANW 0.11%) stock recently dipped after the company posted its second-quarter earnings. Its revenue rose 25% year over year to $1.02 billion, beating estimates by $24 million, as its billings increased 22% to $1.2 billion. Its adjusted net income increased 28% to $154.2 million, or $1.55 per share, which also cleared expectations by 12 cents.
Those headline numbers looked solid, but some investors seemed eager to take profits after the stock price advanced more than 50% over the past 12 months. That might be a sensible move in this frothy market, but I believe investors should actually buy the dip, for five simple reasons.
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1. Rock-solid guidance
Palo Alto expects its billings to rise 20%-22% year over year in the third quarter, and for its total revenue to increase 21%-22%, which matches Wall Street's expectations. But it expects its adjusted earnings to only grow 9%-10%, compared to expectations for 22% growth.
However, Palo Alto's earnings guidance includes its planned takeover of the cloud security start-up Bridgecrew for $156 million. That acquisition was only announced about a week before Palo Alto's earnings report, so it probably wasn't fully baked into Wall Street's earnings estimates yet.
Palo Alto also raised its full-year guidance. It expects its billings to increase 19%-20% and for its revenue to rise 22%-23%, compared to its prior forecast for 20%-21% revenue growth. It expects its full-year adjusted earnings to rise 19%-21%, which matches analysts' expectations and allays concerns about a prolonged earnings decline.
2. Reasonable valuations
Based on those estimates and its current stock price of about $370, Palo Alto trades at 63 times this year's earnings and less than nine times this year's sales.
Analysts expect its revenue and earnings to rise another 18% and 20%, respectively, in fiscal 2022. Based on those forecasts, Palo Alto trades at just over 50 times forward earnings and seven times next year's sales, which makes it much cheaper than higher-growth cybersecurity plays like CrowdStrike (CRWD -0.68%).
However, Palo Alto could still easily surpass those long-term estimates if it continues its inorganic growth strategy, under which it has already spent nearly $3 billion on acquisitions since 2019.
3. An expanding cloud and AI ecosystem
Prior to the Bridgecrew acquisition, Palo Alto acquired the Internet of Things (IoT) security company Zingbox, the machine identity firm Aporeto, the software-defined networking company Cloudgenix, and the attack surface management services firm Expanse over the past year.
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These acquisitions all helped Palo Alto expand its ecosystem beyond its core firewall with cloud and AI services. That transition enables Palo Alto to pivot away from on-site appliances and toward recurring cloud service subscriptions, which are stickier and easier to scale.
That transformation is reflected in the growth of its cloud security suite Prisma Cloud and Cortex, its AI-powered threat detection platform. Prisma Cloud and Cortex served 74% and 66% of the Fortune 100, respectively, at the end of the second quarter.
That's up from 70% for Prisma Cloud and 65% for Cortex in the first quarter, and it indicates that Palo Alto's big acquisitions are paying off. It also indicates Palo Alto won't be rendered obsolete by CrowdStrike, which only provides cloud-native security solutions, anytime soon.
4. Landing and expanding
Palo Alto is leveraging the strength of its main security suite, Strata, to cross-sell its Prisma and Cortex services. That land-and-expand strategy is paying off: 68% of its Global 2000 customers now use more than one of its platforms, up from 62% a year ago and just 56% two years ago.
Palo Alto expects its next-gen security ARR (annual recurring revenue) -- which includes those newer services -- to rise 77% to $1.15 billion, or 28% of its estimated sales, for the full year. That growth should offset its flat growth in product revenue, which mainly comes from older on-site appliances.
5. Rising deferred revenue
Lastly, Palo Alto's deferred revenue, which measures future demand for its products and services, rose 30% year over year to $4.2 billion during the second quarter. That stable growth, which marks a continuation of its double-digit growth over the past year, supports its rosy full-year guidance.
The key takeaways
I recently called Palo Alto Networks my top cybersecurity stock to own for 2021, since it offers a stable balance of value and growth. Investors shouldn't fret over the short-term noise surrounding its latest acquisitions and should consider buying this dip instead of prematurely taking profits.
